Intergenerational Risk Sharing with Market Liquidity Risk

Tinbergen Institute Discussion Paper 2022-028/V

47 Pages Posted: 27 Apr 2022

See all articles by Daniel Dimitrov

Daniel Dimitrov

University of Amsterdam; Tinbergen Institute

Date Written: March 30, 2022


This paper examines the optimal allocation of risk across generations whose savings mix is subject to illiquidity in the form of uncertain trading costs. We use a stylized two-period OLG framework, where each generation makes a portfolio allocation decision for retirement, and show that illiquidity reduces the range of transferable shocks between generations and thus lowers the benefits of risk-sharing. Higher illiquidity then may justify higher levels of risk sharing to compensate for the trading friction. We still find that a contingent transfers policy based on a reasonably parametrized savings portfolio with liquid and illiquid assets increases aggregate welfare.

Keywords: intergenerational risk sharing, (il)liquidity, stochastic overlapping generations, funded pension plan

JEL Classification: G11,G23,E21,H55

Suggested Citation

Dimitrov, Daniel, Intergenerational Risk Sharing with Market Liquidity Risk (March 30, 2022). Tinbergen Institute Discussion Paper 2022-028/V, Available at SSRN: or

Daniel Dimitrov (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB

Tinbergen Institute

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